THE RETURN OF THE STATE?

FRENCH ECONOMIC POLICY UNDER NICOLAS SARKOZY

by

Jonah D. Levy

Department of Political Science

University of California Berkeley

jlevy@berkeley.edu

Paper presented to the 12th

Biennial Meeting of the European Union Studies Association,

Boston, MA, 3-5 March 2011.

Abstract: France would seem to be a prime candidate for a vigorous state response to the

economic crisis. The country has a long tradition of dirigiste or state-led economic

development and its President, Nicolas Sarkozy has been an outspoken critic of laissez-

faire capitalism and proponent of more robust regulation. Following the 2008 financial

meltdown, the Sarkozy administration announced a series of statist initiatives, ranging

from fiscal stimulus, to industrial policy, to financial and economic regulation. Yet this

paper will show that the reality of France’s response to the crisis has fallen well short of

the statist rhetoric. The government has committed few additional resources, displayed

little inclination to steer business strategies, and balked at issuing regulations in the

absence of pan-European coordination. This paper argues that Sarkozy’s neo-statist

initiatives have been largely checked by the legacies of shifts in French economic policy

a quarter-century ago. In particular, the break with the dirigiste model in 1983 has

deprived French authorities of many of the institutions and instruments associated with

state-led development, while the massive expansion of social and labor market programs

that eased the movement away from dirigisme has left the government without the fiscal

capacity to launch expensive new promotional policies. The broader lesson is that a

country’s response to crisis is shaped by long-term structural factors, not just short-term

political calculations, and that even when neo-liberalism is widely believed to have

failed, a statist response must be forged, not simply presumed.

1

THE RETURN OF THE STATE?

FRENCH ECONOMIC POLICY UNDER NICOLAS SARKOZY

France has long stood for a dirigiste or statist approach to economic

development.1 Over the past few decades, French policy-makers have been denounced

on a regular basis by economists and international organizations for failing to control

government spending and move in a neo-liberal direction with sufficient vigor. But in

2008, the neo-liberal model experienced its worst crisis since the 1930s, and among the

affluent democracies, those countries like the US and UK that had most closely

approximate the neo-liberal model seemed to suffer the greatest fall. Thus, pundits and

politicians in France have voiced more than a little schadenfreude.

Beyond a chance to gloat, the financial meltdown would seem to offer a golden

opportunity for a revival of the kinds of dirigiste policies that France has long embraced.

The crisis has rehabilitated state intervention in the economy. Governments everywhere

are intervening in all manner of ways: bailing out banks and auto companies, providing

macroeconomic stimulus, pondering new forms of regulation of financial markets and

executive compensation.

French President, Nicolas Sarkozy has been at the forefront of this return of the

state. Sarkozy has been active in denouncing the excesses of laissez-faire capitalism and

calling for new regulations of financial institutions and executive pay. He has also

launched a series of industrial policy initiatives. To many observers, Sarkozy incarnates

the renewed demand for a statist approach to economic policy.

This paper suggests, however, that there is a Potemkin village quality to

Sarkozy’s statist turn. The reality of French economic policy has often fallen well short

of the statist rhetoric. Moreover, there is considerable evidence that Sarkozy is now

moving in a neo-liberal direction.

Why has the neo-dirigiste dog not barked (or, at least, not barked more loudly)?

This paper argues that the pressures and temptations to revive statist policy have run up

against the legacies of shifts in French economic and social policy over the past quarter-

century. Three constraints on statist initiatives stand out. The first relates to institutional

capacity: many of the key agencies and instruments of industrial policy were dismantled

in the 1980s and early 1990s, and globalization has further narrowed regulatory options.

The second constraint concerns fiscal capacity: because the process of moving away

from statist economic policy was accompanied by a massive and expensive expansion of

social measures to pacify and demobilize the victims of economic restructuring, French

authorities lack the financial resources to launch costly industrial policy programs. The

third constraint stems from electoral considerations: Nicolas Sarkozy was elected

President in 2007 on a pledge to wind down and rationalize the bloated French state, so

neo-dirigiste initiatives are at odds with both his campaign promises and the priorities of

his supporters.

The following presentation is organized into six sections. Section 1 situates the

argument in this paper within the literature on Sarkozy’s economic policy. Section 2

1 I wish to thank the following for their comments on earlier versions of the paper:

Richard Deeg, Geoffrey Owen, R. Kent Weaver, Douglas Webber, and John Zysman.

2

describes French economic and social policy prior to Sarkozy and the main challenges

that he confronted when he became President in 2007. Section 3 explains why Sarkozy

initially opted for a neo-liberal economic orientation and describes the characteristic

policies in this vein. Section 4 analyzes Sarkozy’s turn toward neo-statism, both the

reasons and the emblematic initiatives attesting to a “return of the state.” Section 5 points

to the limitations of this statist resurgence. Finally, Section 6 considers the dynamics of

French policy going forward as well as the broader theoretical implications of the

findings in this paper.

Section 1 – Understanding Sarkozy’s Economic Policy Nicolas Sarkozy was elected President in 2007 on a pledge to make a radical

break with the past (or “rupture,” as he termed it). Many equated this shift with a

movement toward neo-liberalism. Indeed, the initial reading of Sarkozy was dominated

by comparisons to Margaret Thatcher, especially in the British press (Heffer 2007;

Kalelsky 2007). Like Thatcher in 1979, Sarkozy took power against a backdrop of

economic decline. Like Thatcher, he emphasized market reform – the reduction of state

spending, tax cuts, and labor market flexibility – as the path to national renewal. And

like Thatcher, Sarkozy appeared willing to take on powerful economic interests – public-

sector employees in his case, as opposed to trade unions for Thatcher – who had defeated

previous government reform efforts. Indeed, when French public employees and

transport workers went on strike in November 2007 to protest the government’s pension

reform, numerous articles in the British press labeled the confrontation as Sarkozy’s

“Thatcher moment,” comparing it to the Iron Lady’s showdown with the coal miners in

1984-1985 (Economist 2007; Schofield 2007; Times 2007; Samuel 2008).

Not everyone accepted this reading of Sarkozy. French observers tended to note

the differences between Sarkozy and Thatcher (Cohen 2007; Dumait 2007; Thiérot

2007). The French President was more willing to negotiate and cut deals to avoid

confrontation, even if this tack required making some concessions. Sarkozy was also less

ideologically committed to free-market principles than Thatcher. He was a friend of

business, rather than a free-market ideologue. Already, in his capacity as Minister of

Finance in 2004-2005, he had displayed a willingness to meddle, orchestrating bailouts

and mergers to protect strategic French companies.

Critics of Sarkozy raised a further objection to the comparison to Thatcher,

arguing that his reforms were more spin than substance (Cahuc and Zylberberg 2009;

Szarka 2009). Sarkozy was constantly announcing new reforms, a strategy that one

leading scholar of French economic policy described as “carpet-bombing” (Cohen 2008),

but many of these initiatives were either largely symbolic or were never fully

implemented. Moreover, Sarkozy’s tendency to strike deals in order to undercut

opposition was claimed to have emptied many of his most significant liberalizing reforms

of substance, in some cases, to the point of actually increasing spending or decreasing

competition (Cahuc and Zylberberg 2009; Webber 2009). The notion of a substantial gap

between rhetoric and reality was crystallized in a jibe by the former head of the Socialist

3

party, François Hollande, who accused Sarkozy of engaging in a coup d’éclat permanent

(permanent splashy, but hollow gestures).2

With the financial meltdown of 2008, a new image of Sarkozy emerged.

Sarkozy’s response to the crisis struck many observers as a revival of the old Gaullist,

dirigiste state (Askolovitch 2010; Economist 2010; Economist 2010). The government

bailed out the banking and auto industries; it also created a sovereign wealth fund and

other industrial policy instruments. Moreover, Sarkozy himself has issued a series of

ringing denunciations of free-market capitalism, calling for a “return of the state” and a

wave of new regulations. A 2010 book by Steven Hill, which argues for the superiority

of European regulated and social capitalism over US capitalism, opens with a depiction

of Sarkozy as the most pro-American President in memory, but also as the most forceful

critic of the American financial system and advocate of increased state regulation of

global capitalism (Hill 2010: ix-x). The Economist magazine offers a less nuanced

portrayal. In its edition of 7-13 August 2010, emblazoned with a cover reading,

“Leviathan Inc.: The State Goes Back Into Business,” France is presented as exhibit A of

“a renewed trend of industrial intervention by governments in rich countries” (p. 68).

French industrial policy is also described as “the most defensive and politically driven of

any country” (p. 70).

Anglo-American observers are not alone in suggesting that Sarkozy has returned

to France’s statist roots. A number of French scholars depict Sarkozy’s economic policy

in a similar light (Aghion and Cage 2010; Askolovitch 2010; Chevallier 2010). French

accounts tend to place less emphasis on Sarkozy’s personality than on structural factors:

the French state is intervening widely because the economic context demands it. In this

spririt, Philippe Aghion and Julia Cage contend that 2008 crisis has relegitimated state

intervention across an array of functions:

If there is one positive consequence of the crisis, it is to have

legitimated the role of the State in economic growth. An intelligent

State, a regulating State in times of crisis, but also an essential actor

in other times, as a catalyst of knowledge and innovation, a vector

of sustainable growth, and a guarantor of the social contract

(Aghion and Cage 2010: 59). 3

Luc Ferry, a French philosopher and former Minister of Education, offers perhaps

the strongest statement of the structuralist view, of the notion that structural economic

imperatives are driving the revival of the French state. According to Ferry, the 2008

financial meltdown engendered an economic policy U-turn much like that of the

2 The phrase coup d’éclat permanent is a play on words. Hollande was alluding to a book

by former French President, François Mitterrand entitled, Le coup d’état permanent (the

permanent coup d’état). Mitterrand’s book criticized the authoritarian character of the

Fifth Republic under Charles de Gaulle, suggesting that it was the equivalent of a

permanent military regime or coup d’état. Hollande’s play on words, then, combines a

critique of the alleged showy, but empty character of Sarkozy’s reforms (coup d’éclat)

with the suggestion that Sarkozy is governing in an authoritarian manner (coup d’état). 3 All translations from the French are the author’s.

4

Mitterrand administration in 1983, albeit in reverse. In 1983, a leftist government elected

on an agenda of ultra-voluntarist industrial policy veered in a sharply liberal direction

under the pressure of international and economic constraints. Twenty-five years later, in

2008, Ferry contends that a rightist government elected on an agenda of neo-liberal

reform has moved in a neo-dirigiste direction under the pressure of the international

financial meltdown and accompanying recession:

The crisis has come along and invalidated all the themes of the

2007 [presidential] campaign, the first campaign of an unabashed

right finally at ease with itself. The campaign was liberal,

deregulatory, and pro-American. We were going to sweep away

the old world, finish with the long, Chiraquian slumber and the

“French social model”! And then the crisis came. Like the left in

1983, the right makes a 180-degree turn. President Sarkozy takes

on the mantle of protector, regulator, almost anti-capitalist…

(Askolovitch 2010)

While appealing in their simplicity and symmetry, arguments that economic

circumstances have driven a revival of dirigiste policy-making or even a 1983 in reverse

exaggerate the extent of Sarkozy’s neo-statist turn. This paper will show that French

practice has fallen well short of the statist rhetoric. Part of the reason is Sarkozy’s

penchant for spin. More fundamentally, though, the revival of state intervention is not

simply a matter of tinkering with policy. It requires considerable state capacities and a

commitment to channeling significant resources to new interventionist projects. Such

efforts have not been forthcoming in the France of Sarkozy. The reason, this paper

argues, is that the context for French economic policy is very different from that of the

dirigiste heyday more than a quarter-century ago.

In 1983, for a variety of economic and political reasons, French authorities began

moving away from the statist or dirigiste model. More than twenty-five years later, this

shift has constrained the possibilities for a return of the state in three ways. First, the

break with dirigisme led to the elimination of many of the key instruments and

institutions of state-led economic development. These include: a large swathe of

companies owned by the state; rationed and state-administered lending; price, capital, and

credit controls; substantial industrial policy budgets; and an agency with a vocation to

engage in sectoral economic planning. Consequently, Sarkozy’s administration finds

itself lacking both the vision and policy tools necessary for effective industrial policy.

A second constraint on statist initiatives concerns fiscal resources. In moving

away from dirigisme in the 1980s and 1990s, French authorities committed a vast amount

of money to restructure industry and especially to take care of and demobilize those

dislocated by economic restructuring. This movement from a dirigiste state to what I call

a “social anesthesia state” took public spending to unprecedented heights, leaving little

fiscal capacity to fund industrial policy (Levy, Miura et al. 2006; Levy 2008).

The third constraint on a revival of statist industrial policy stems from Sarkozy’s

positioning on the reform of the social anesthesia state. If the expansion of state spending

to facilitate de-dirigisation was understandable and probably necessary for political

reasons, over the years, it has come to be seen as an economic liability, hamstringing

5

French competitiveness and job creation. Nicolas Sarkozy structured much of his 2007

presidential campaign around a pledge to prune and reform the bloated social anesthesia

state. Moreover, this liberalizing agenda appeals to his core constituents on the right.

Consequently, the revival of state intervention is at odds with both the agenda on which

Sarkozy was elected and the preferences of most of his supporters.

To understand France’s response to the 2008 meltdown under Sarkozy, then, it is

necessary to situate the government’s actions in the longue durée. Sarkozy is not

operating with a clean slate. Rather, he is constrained by the legacies of past policy

choices and his own campaign promises. The next two sections present the constraints

under which Sarkozy is operating, first describing the movement from the dirigiste state

to the social anesthesia state, then analyzing the forces behind and content of Sarkozy’s

initial liberalizing orientation.

Section 2 – The Social Anesthesia State and Its Limits The agenda of economic liberalization that Sarkozy brought to the Elysée in 2007

can be best understood as a response to the evolution of French economic policy and the

state over the previous quarter century. Beginning in 1983, the dirigiste state, which

sought to steer the economy through a variety of interventionist mechanisms, was

essentially dismantled. The alternative was not a neo-liberal state, however. Rather, in

order to make the dismantling of dirigisme socially and politically acceptable, French

authorities constructed what I call the “social anesthesia state,” a series of generous labor

market and social policies designed to dull the pain of economic restructuring and

demobilize potential victims and opponents of economic liberalization (Levy, Miura et al.

2006; Levy 2008). The social anesthesia state enabled French firms to reorganize on a

more market-rational basis, but also generated problems of its own, most notably, high

levels of state spending and reduced labor force participation. For candidate Sarkozy in

2007, the central challenge confronting the French economy was to prune and reform the

social anesthesia state. This section describes the emergence of France’s social

anesthesia state, its role in economic restructuring, and the growing limits and

dysfunctions that fueled Sarkozy’s critique.

France has long embodied the possibilities for state-led or dirigiste economic

development (Shonfield 1965; Cohen 1977; Katzenstein 1978; Zysman 1983; Hall 1986).

For decades, French planners aggressively manipulated an array of policy instruments –

from trade protection, to subsidies, to cheap credit, to exemption from price controls – in

an effort to accelerate the pace of economic modernization. French authorities channeled

resources to privileged groups, favoring investment over consumption, industry over

agriculture, and big business over small. They also “picked winners,” both specific

sectors, such as coal and steel in the reconstruction era and nuclear power and

telecommunications in the 1970s, and specific firms, the so-called “national champions,”

multinational corporations anointed as France’s standard-bearers in the battle for global

economic leadership. When “national champions” did not exist, French planners

constructed them through a series of state-sponsored mergers; when “national

champions” lacked capital, the planners financed them through cheap capital and

guaranteed state markets; and when “national champions” were deficient in technology,

state-run labs performed research for them, transferring cutting-edge solutions in

6

computers, nuclear power, high-speed trains, and digital telecommunications switches

(Cohen and Bauer 1985; Cohen 1992).

Beginning in 1983, French policy took a new direction. Confronted with double-

digit inflation, rising trade and budget deficits, stagnant investment, and a currency crisis

that threatened to push the French franc below the minimum exchange rate allowed by

the European Monetary System (EMS), Socialist President, François Mitterrand opted to

reverse his government’s voluntarist tack. A leftist administration that had been elected

just two years earlier on a campaign to intensify dirigisme began instead to dismantle

dirigisme.

The 1983 U-turn touched off a range of reforms that struck at the core of the

dirigiste model (Hall 1990; Levy 1999; Levy 2000). Among the most important changes

were: the winding down of industrial policy; the privatization of virtually the entire

public sector; the shift from a reflationary macroeconomic stance to tight monetary policy

prioritizing the fight against inflation; the lifting of price controls and capital controls; the

ending of credit rationing; the de-indexing of wages and easing of restrictions on lay-offs,

part-time employment, and fixed-term contracts. These reforms left no dirigiste stone

unturned. Looking across the wealthy democracies, one would be hard-pressed to find

any country that shifted so far away from its postwar economic strategy as the France of

François Mitterrand and Jacques Chirac. Certainly, compared to other statist political

economies, such as Japan and Korea, France moved earlier and more aggressively against

its postwar policy model (Levy, Miura et al. 2006).

The rollback of the dirigiste state was not the whole story, however. The

construction of the social anesthesia state played a critical role in this move away from

dirigisme. In a logic first articulated by Karl Polanyi, the extension of market forces was

softened, made politically acceptable through the expansion of social protections for

those most affected by liberalization (Polanyi 1944). On the one hand, beginning in

1983, state authorities made a market, imposing liberalization from above. Austerity,

privatization, deregulation, and labor market flexibility all heightened the vulnerability of

French workers. On the other hand, successive governments, especially those on the left,

expanded social and labor market provisions, so as to cushion the blow to the working

class and, equally important, to undercut the possibilities for union mobilization (Daley

1996; Levy 1999). This social anesthesia strategy centered initially on two sets of

policies.

The first was the creation of some fifteen "conversion poles" in geographic areas

that were especially hard-hit by the industrial restructuring launched in 1983. The

government made no effort to hide the link between industrial restructuring and strategies

of territorial and worker compensation: the creation of the conversion poles was

announced the same day as retrenchment plans in the coal, steel, and shipbuilding sectors.

The conversion poles received sizable subsidies to help clean up unsightly abandoned

factories, retrain workers, modernize infrastructure, and support new technologies and

emerging high-tech start-ups. From the perspective of displaced workers, the biggest

advantage of the conversion pole program was the possibility of retiring on full pension

as early as age 50 (as opposed to age 55 or 60 under normal conditions).

This points to a second dimension of the state’s social anesthesia strategy -- a

huge expansion of the possibilities for early retirement, not just in the conversion poles,

but in every troubled industrial agglomeration. The expansion of early retirement to

7

accommodate and humanize restructuring began under the Giscard presidency. Between

1974 and 1980, the number of early retirees more than tripled from 59,000 to 190,400

(DARES 1996: 100). The left tripled the figure again to over 700,000 workers in 1984.

Beyond salving the left’s guilty conscience, the widespread recourse to early retirement

served a more strategic purpose - demobilizing France’s working class and undercutting

trade union capacity to mount resistance to industrial restructuring. The vast majority of

French workers were more than willing to quit smelly, physically taxing, alienating jobs,

to receive 90 percent of their previous wages without having to report to work. In such a

context, France’s already anemic trade unions were completely incapable of mobilizing

their members to fight industrial restructuring. The effects of early retirement on the

French labor market cannot be overestimated. Today, fewer than one worker in three is

still employed at age 60, and France's labor force participation rate for men aged 55 to 64

is under 40 percent, among the lowest figures in Western Europe (Scharpf and Schmidt

2000: 350).

Social anesthesia policies were deployed not only to facilitate the movement away

from dirigisme, but also to palliate the perceived limits or failings of economic

liberalization, in particular, the persistence of mass unemployment. In 1988, the Socialist

government of Michel Rocard government established a national social safety net or

guaranteed income, the revenu minimum d'insertion (RMI). The RMI provides a monthly

allowance, ranging from €455 for a single individual to €955 for a family of four (plus

€182 for each additional child), on a means-tested basis to citizens and long-term

residents over the age of twenty-five. The RMI replaced a patchwork of local and

targeted social assistance programs that had left large segments of the population

uncovered, notably the long-term unemployed and persons suffering from psychological

problems, alcoholism, and/or chemical dependency. Of particular importance, the RMI

often functions as a basic income support for adults who have exhausted or failed to

qualify for unemployment insurance. The creation of the couverture maladie universelle

(CMU) in 2000 by another Socialist government, that of Lionel Jospin, has likewise

helped alleviate the effects of mass unemployment. The CMU not only extended basic

insurance to the 200,000 French citizens (0.3 percent of the population) who lacked such

coverage, but perhaps even more significantly, offered supplementary health insurance to

the 15 percent of the population not covered by employers and facing sizable co-

payments for medical procedures.

Governments of left and right alike have also multiplied labor market policies to

limit the suffering of those who are unable to secure stable employment. The right has

tended to focus on subsidies and tax breaks for private employers who agree to hire hard-

to-place employees (youths, the unskilled, older workers) at the bottom of the wage

spectrum. Such programs cost €17 billion in 2005. The left has favored training

programs as well as public internships. The Jospin government's programme emplois

jeunes (PEJ), for example, provided five-year positions in the public sector to some

350,000 young people at a cost of €5.3 billion. The left also presented its 35-hour

workweek reform as a way of creating (or sharing) jobs, although this analysis was hotly

contested by economists, employers, and the parties of the right.

Looking at labor market policy globally, Figure 1 reveals that the number of

French workers enrolled in some kind of public labor market program expanded two-and-

one-half-fold during the 15 years following the Socialists’ U-turn -- rising from slightly

8

under 1.2 million in 1984, at the height of industrial restructuring, to nearly 3 million in

1999 (DARES 1996; DARES December 2000). This total is in addition to the 2 to 3

million French workers who are formally unemployed. Aggregate spending on labor

market policy showed a similar increase, expanding from slightly over 2 percent of GDP

in the mid 1980s to 4.67 percent of GDP in 2003 (INSEE 2005). Today, France spends

as much as on labor market intervention as Sweden, the Mecca of active labor market

policy. The growth of the welfare state has been equally dramatic. Social spending in

France rose from 21.3 percent of GDP in 1980 to 26.5 percent in 1990 to 29.5 percent in

1998 (OECD 2002), giving France the biggest welfare state outside Scandinavia.

France's break with dirigisme in the 1980s provided a dual impetus to the social

anesthesia state. The promise of liberalization induced authorities to commit vast

resources to the transition process, to the alleviation of social pain and political

resistance, in the expectation that a more flexible labor market would quickly generate

enough jobs make such costly transitional measures unnecessary (or, at least, much less

necessary). The disappointments of liberalization, the continuing high levels of

unemployment not only made it impossible to wind down supposedly transitional early

retirement measures, but also drove new spending in the form of employment promotion

and social assistance programs. In short, "de-dirigisation" and the expansion of the

social anesthesia state were two sides of the same (very expensive) coin (Vail 2010).

The social anesthesia strategy brought real benefits to the French economy.

Whereas the dirigiste state sought to steer the market, the social anesthesia state

underwrote market-led, privately determined adjustment strategies. By protecting French

workers from the worst effects of job loss, the state allowed employers to reorganize their

companies, closing unprofitable factories and downsizing plants as necessary. In the

1980s, French industry rationalized, returned to profitability, and drew down its heavy

debt. France’s balance of trade shifted into surplus, as French firms met European and

global competition with great success. Today, French productivity, measured as output

per worker, is second only to that of the United States, while France is the world leader in

output per hour worked (Editorial Staff 2005).

The social anesthesia strategy, as the label suggests, offered social as well as

economic benefits. French companies were able to reorganize, much like their American

or British counterparts, but worker living standards were protected. In other words, the

costs of industrial adjustment were socialized to the collectivity, rather than concentrated

on those who lost their jobs. French authorities have also been attentive to new social

needs, establishing programs like the RMI and CMU to address emerging gaps in the

social insurance system. In short, the social anesthesia state moved France toward the

market, while offering relatively humane treatment to the victims of industrial

restructuring and economic liberalization.

If the social anesthesia strategy facilitated de-dirigisation and industrial

restructuring, it also generated problems of its own. For starters, the social anesthesia

state is very expensive. From a fiscal standpoint, the multiplication of social anesthesia

measures has more than offset the savings from de-dirigisation. Despite the winding

down of expensive industrial policy measures, state spending has increased since the

early 1980s, approaching 55 percent of GDP. While one can certainly sympathize with

the effort to protect the poor and vulnerable, the cost of these programs has pushed the

French state to the limits of its taxing capacity.

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The high cost of the social anesthesia state has also compromised public

investment, a historic strength of the dirigiste model. In the past, French authorities

invested heavily in public infrastructure and supported industrial development through

lucrative government contracts. The result was an impressive array of programs and

facilities -- highways, high-speed trains, nuclear energy, urban transportation, advanced

telecommunication, public R&D -- that enhanced the business climate. More recently,

this public investment vocation has been largely crowded out by social anesthesia

spending. Indeed, in some cases, the government has actually withdrawn resources from

the public sector.

French authorities have shortchanged public investment in a number of areas.

Government spending on R&D declined from 1.26 percent of GDP in 1992 to 1.03

percent in 2002, at a time when the US, Scandinavia, China, and India were intensifying

their investments in the knowledge economy (Ministry of Industry 2004). In 2001, the

government set a very high price (initially, almost €5 billion) for third-generation mobile

telephone licenses (UMTS), slowing the roll-out of a critical new technology in order to

raise revenues to improve the country's fiscal position and offset future pension

obligations (Cohen and Mougeot 2001). Most recently, after creating a special fund to

reinvest the proceeds from toll roads into future highway development, the Chirac

government opted to privatize the toll roads to generate funds to reduce the 2006 budget

deficit. In all of these instances, public investment took a back seat to social anesthesia.

A second problem of the social anesthesia state concerns the labor market. The

social anesthesia state is largely passive; it pays people not to work. If this represents an

improvement over bailing out uncompetitive companies in order to prevent lay-offs, one

can imagine better uses for the money. Social democratic regimes like that of Sweden,

for example, spend as much or even more than France on social programs, but the social

democratic approach is centered around the so-called “work line,” the notion that every

adult should be employed (Titmuss 1987; Esping-Andersen 1990; Huber and Stephens

2001). As a result, passive measures tend to be limited, with much of the spending

concentrated on “activating” policies that facilitate employment, such as education and

training, relocation assistance, and low-cost public childcare. Under the “active” or

“social investment” model, there is an economic pay-off beyond simply keeping

displaced workers from protesting and blocking lay-offs. France’s social anesthesia

strategy offers few such benefits, few if any gains in human capital and employment.

Related to its passive orientation and high cost, the social anesthesia state is

widely blamed for pushing up unemployment. Despite the proliferation of early-

retirement and make-work programs, the official unemployment rate has remained in the

range of 7 to 12 percent for two decades. France's minimum wage is quite generous

(€1344 per month), and social security charges can add as much as 40 per cent to the

wage bill. Critics charge that this combination of high statutory wages and payroll taxes

is pricing French workers out of the labor market. One reason why French productivity is

so high is that the country has not been able to generate many low-wage, low-

productivity jobs. Moreover, fairly generous benefits can discourage job search by

offering a reasonably attractive alternative to paid employment, particularly part-time

jobs.

The third problem of the social anesthesia strategy is that the anesthetic appears to

be wearing off. Social anesthesia is a far cry from social integration. A minimum

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income of €455 per month may be acceptable as a stopgap, but not as a way of life. In

the long run, the RMI is no substitute for social integration through a steady job, for

upward social mobility. Many of the supposed beneficiaries of social anesthesia policies

harbor great bitterness toward a government that offers them meager allowances and a

succession of dead-end internships and substandard part-time or temporary jobs. This

dissatisfaction probably cost Lionel Jospin the Presidency in 2002, as leftist voters

flocked to three different Trotskyite parties, preventing Jospin from qualifying for the

run-off election with President Chirac. This dissatisfaction has also helped fuel the rise

of the xenophobic, racist National Front of Jean-Marie Le Pen, which has become the

number one party among both blue-collar workers and the unemployed. Perhaps most

dramatically, resentment against social exclusion and limited job opportunities fanned the

flames of the November 2005 upheaval in the French suburbs, which was spearheaded by

marginalized, unemployed youths in the immigrant community.

Contrary to the dominant depictions, French economic policy changed

dramatically in the years after 1983 (see also Vail 2010). The dysfunctional dirigiste

apparatus was dismantled, while social anesthesia programs were established to protect

and demobilize the victims of market-driven restructuring. The problem is not that

France failed to change, but rather that the social anesthesia solutions to the challenge of

de-dirigisation generated dysfunctions of their own. These dysfunctions, in turn, laid the

foundations for the Sarkozy administration’s liberal economic orientation.

Section 3 – Reforming the Social Anesthesia State Nicolas Sarkozy brought a clear liberalizing agenda to the Elysée in 2007. Part of

the reason, as described above, was dissatisfaction with the social anesthesia state.

Whatever its economic and political benefits in meeting the challenge of de-dirigisation,

France’s social anesthesia state was now imposing significant costs. Although the French

generally refer fondly to their “social model” or “system of social protection,” which they

contrast to the heartless, lean-and-mean American model (Smith 2004), Sarkozy

countered that a system that generated mass unemployment could in no way be viewed as

a “social model.” Sarkozy hammered away at the failings of the social anesthesia state:

“Today, there are three certainties: the [French social] system is not financially

sustainable, it discourages employment … finally, it does not provide equality of

opportunity” (Libération, 18 September 2007). In Sarkozy’s view, the social anesthesia

state produces “more injustice than justice …. We must change it.”

Sarkozy did not just denounce the failings of France’s social system; he also ran

for President on a pledge to overhaul it. Already in 2004, while serving as Minister of

the Economy, Sarkozy had tasked Michel Camdessus, a former head of the IMF known

for his neo-liberal orientation, to head a commission to identify solutions for renewing

French economic growth. The Camdessus report proposed to “jumpstart” the French

economy through a series of mostly neo-liberal reforms: cutting public spending by one

percent of GDP every year, bringing tax rates down to the level of France’s European

competitors, eliminating the distinction between highly protected permanent workers and

unprotected temporary workers, reducing the costs and uncertainties encountered by

firms making lay-offs, limiting increases in the minimum wage, introducing flexibility

into the 35-hour workweek, and allowing employees to “work more to earn more”

through generous tax treatment of overtime hours (Camdessus 2004). Sarkozy referred to

11

the Camdessus report as his “bedside reading” or “bible,” and most of its proposals made

it into his 15-point presidential program (Sarkozy 2007). In addition, the phrase “work

more to earn more” became a staple of Sarkozy’s campaign speeches.

Sarkozy’s presidential campaign meant that for the first time in a generation, a

French President could claim a democratic mandate for far-reaching market reform. In

the past, French leaders from Mitterrand to Chirac to Jospin, had secured election on

promises to expand state intervention to heal France’s economic and social woes, then

backtracked toward a more orthodox economic agenda shortly after assuming office.

Because they lacked a mandate for market reform, indeed were seen as having betrayed

their campaign promises, Mitterrand, Chirac, and Jospin could move only incrementally

at best and often by “stealth” (Gordon and Meunier 2001). Sarkozy, by contrast,

campaigned against the status quo and the French social model. Although he generally

avoided the “L word” (liberalism), Sarkozy promised a “rupture” if elected, with an

emphasis on such neo-liberal measures as lowering the tax burden, expanding labor

market flexibility, and rewarding work (“more pay for more work”).

Electoral and clientelist considerations reinforced the government’s neo-liberal

orientation. In the long term, Sarkozy certainly hoped that the pruning and reform of the

social anesthesia state, by strengthening the French economy and encouraging

employment, would benefit all citizens. Even if the economic results fell short of these

hopes, however, the immediate effect of the reforms was to largely reward friends and

punish enemies. Government spending cuts would impose costs on civil servants and the

recipients of social services, who generally vote for the left, while tax cuts would rebound

largely to the advantage of high-income conservative supporters. Thus, economic

diagnosis, presidential campaigning, and electoral calculations combined to push the

Sarkozy administration toward an overhaul of the social anesthesia state.

The government’s liberalizing agenda contained three main components: tax cuts,

reductions in state spending, and measures to increase labor market flexibility. Of

course, the three components were interrelated. In order to contain France’s already

sizable budget deficits, any tax cuts would have to be offset by reductions in government

spending of at least equal size. Similarly, part of the strategy for encouraging labor

market participation was to increase the returns to paid employment by reducing the taxes

of those who were working (tax cuts) and the social transfer payments of those who were

not (spending cuts). More fundamentally, though, the three components of the

government’s agenda all reflected an effort to curtail and reform the social anesthesia

state: to lighten the tax burden, scale back public spending, and make labor markets less

“passive” and more employment friendly.

1) Tax Cuts

The Sarkozy administration’s first major initiative was in the area of tax relief. In

the summer of 2007, Parliament enacted the Law in Favor of Labor, Employment, and

Purchasing power (Loi pour le Travail, l’Emploi, et le Pouvoir d’Achat or TEPA), a

package of cuts totaling roughly EUR 15 billion per year (Greciano 2008; Monnier

2009). The TEPA was often referred to by the government as the “fiscal shock” or

“growth shock” because it was supposed to give a kick-start to economic growth. The

evocation of “labor, employment, and purchasing power” stemmed mainly from the

provision of the law exempting overtime hours from income and payroll taxes, at a cost

12

of approximately EUR 6 billion per year. This tax break allows employees to retain a

greater share of their overtime earnings, thereby honoring Sarkozy’s campaign pledge to

encourage the French to “work more to earn more.”4

Despite the law’s labeling, the rest of the TEPA tax breaks do little to reward

work. One provision provides for the deductibility of 20 percent of home mortgage

interest for the first five years of the loan (up to a maximum of EUR 8,500 per year for a

family of four); another reduces inheritance and wealth taxes. The most controversial

provision in the TEPA involves the so-called “fiscal shield,” a ceiling on the total direct

tax liability of any individual. The Chirac government had established the fiscal shield in

2006, setting it at 60 percent of earnings. Arguing that, “one should not take from

someone more than half of what he earns,” Sarkozy reduced the figure to 50 percent

(Libération, 31 March 2010). The TEPA also incorporated various social security

charges (CSG, CRDS) into the fiscal shield. Far from rewarding work, the “fiscal shield”

delivers the vast proportion of its benefits to France’s most affluent citizens, whose

wealth and income derive largely from real estate and stock holdings. According to a

report by a Member of Parliament from Sarkozy’s UMP party, in 2008, the top 1,000

beneficiaries received 74 percent of the savings from the fiscal shield, an average of EUR

337,241 per household (Carrez 2009). This figure represented an increase of 85 percent

over the previous year, thanks to the TEPA.

2) Reductions in Public Spending

Given that France was already battling with the European Commission over its

excessive budget deficits when Sarkozy came to office, tax cuts like the TEPA needed to

be accompanied by austerity measures on the spending side. Sarkozy pledged that the

government would finally get serious about living within its means. His Prime Minister,

François Fillon railed against past fiscal irresponsibility and declared that it was time for

France to turn over a new leaf:

I am at the head of a State that is in a situation of financial

bankruptcy. I am at the head of a State that has run chronic

deficits for the last fifteen years. I am at the head of a State that

has not balanced a budget in twenty-five years. This can’t

continue (Libération, 22 September 2007).

As a symbol of its commitment to shrinking the state, the Sarkozy administration

instituted a policy of not replacing one retiring civil servant out of two. The clear

message was that the French state contains considerable pockets of inefficiency and

should be able to do more with less. This attrition policy eliminated nearly 100,000

positions in the civil service from 2007 to 2009, with about 40,000 job reductions in the

national education system. The Ministry of the Interior (police) and Ministry of Defense

4 Critics of the tax cut countered that it would mainly encourage employers to substitute

overtime hours for new hires, with little or no net gain in hours worked. Another concern

was that employers and workers would collude to defraud the tax and social security

system by shifting payments from bonuses and other kinds of payments that are taxed to

overtime hours that are tax-free.

13

were also hard hit, and in 2009, employment in public hospitals shrank for the first time

ever (Libération, 21 January 2010).

Another important austerity measure was the reform of the so-called “special

pension regimes” (régimes spéciaux) that had enabled certain categories of public

employees (mainly transportation and energy workers) to retire as early as age 50

(Howell 2008). The special pension regimes symbolized much of what Sarkozy found

objectionable about the social anesthesia state: they were expensive; they paid people not

to work; and they provided what seemed like disproportionate benefits to a privileged

group of public employees (although these workers countered that generous pensions

were compensation for wages that were often lower than in the private sector).

Moreover, public transportation workers had repeatedly derailed government reforms,

like the 1995 Juppé Plan, through crippling strikes and protests. The fall 2007 reform of

the régimes spéciaux, which essentially aligned the requirements for receiving a full

pension on those of other public sector workers, did trigger strikes and transportation

shutdowns, but Sarkozy was able to avoid the plight of Juppé. Unlike his predecessor,

Sarkozy could claim a democratic mandate for the changes that he was proposing. He

also displayed greater political skill. Sarkozy made a point of meeting repeatedly with

the unions, stating that he was open to negotiating the terms of the reform, and extending

a small degree of compensation to workers who lost their early retirement benefits (in the

form of higher wages and a more generous reference wage for the calculation of

pensions). Perhaps for these reasons, in contrast to 1995, public opinion polls in 2007

leaned toward the government over the strikers, and the reform went through largely on

the administration’s terms.

3) Labor Market Activation

In addition to seeking to shrink the social anesthesia state through a combination

of spending and tax cuts, the Sarkozy administration dedicated considerable effort to

making the French welfare system more “active,” that is, more favorable to employment.

This “activation” effort had several strands. One was to rein in opportunities for early

exit from the labor market. The reform of the régimes spéciaux raised the effective

retirement age by five to ten years among the affected workers, and the government

clamped down on other programs that subsidized early retirement. Along with these

sticks, the administration tendered carrots to older French employees, such as relaxed

rules on combining employment and pension income and a more generous calculation of

pension benefits earned for those who remain employed beyond the age of 60 (OECD

2009: 53-55).

A second strand of the government’s activation strategy was to curb regulations

that were said to impede job creation. France’s very high minimum wage (SMIC), at

over EUR 1300 per month, is widely believed to discourage hiring among young and

unskilled workers (Minc 1994). The government has, therefore, refused to continue the

tradition of providing a “nudge” (coup de pouce) to the SMIC beyond the legally

mandated adjustment for inflation (OECD 2009). The government also sought to make it

easier for employers to undertake lay-offs, arguing that this facility would encourage

greater hiring in the first place. In particular, a 2008 reform allowed employers to

terminate permanent job contracts (contrats à durée déterminée, CDD) by mutual

agreement with employees (with employees gaining access to better social benefits in

14

return). The government enacted another deregulatory law in summer 2009, seeking to

expand employment in the retail sector by allowing stores in urban and tourist zones to

remain open on Sundays (Greciano 2010). In many cases, the stores were also exempted

from having to provide bonus pay for Sunday work.

Of course, the administration’s biggest regulatory bogey has been the Jospin

government’s 35-hour workweek. Sarkozy has blamed the 35-hour workweek for

everything from “killing French industry” (Libération, 4 March 2010) to causing mass

unemployment:

Why is there so much more unemployment in our country?

Because we chose to share jobs rather than pursue growth …

[This] choice of the 35-hour workweek has revealed itself to be a

catastrophe (Libération, 1 February 2010).

Yet the government has stopped short of repealing the 35-hour workweek. The

right is wary of a potential backlash among employees, who have become attached to the

system (and often made important concessions in negotiations with employers to

establish the 35-hour workweek). Instead of a frontal assault, the Sarkozy administration,

following the lead of the Chirac administration, has proceeded incrementally, gradually

emptying the 35-hour workweek of much of its substance (Howell 2009; OECD 2009).

Although the formal law remains in place, legislative changes introduced in 2003, 2005,

and 2007 have effectively made it possible for employers to increase the workweek to 39

hours by simply paying a 10 percent wage premium on the extra hours and negotiating

the changes with workplace representatives. Moreover, under the TEPA law, employers

receive reductions on their taxes and social security charges for the extra hours.

A third strand of the government’s activation strategy was to increase the pressure

on the unemployed to take jobs. A law in early 2008 merged the unemployment benefits

service (UNEDIC) with the job placement agency (ANPE) into a so-called “Employment

Pole” (Pôle Emploi). Aside from providing a one-stop shop for job seekers, the creation

of the Employment Pole sent the message that the unemployed could no longer passively

receive their checks (UNEDIC), but were expected to actively search for work (ANPE).

More concretely, the August 2008 Law on the Rights and Duties of Job Seekers

established the requirement that all job seekers devise individualized “employment plans”

in cooperation with their advisors at the Employment Pole (OECD 2009: 48-49). These

employment plans are then to be used to determine appropriate job opportunities, and if

an unemployed person turns down more than two “reasonable offers of employment,”

unemployment benefits are suspended for two months initially, with the sanctions rising

for successive refusals. Job seekers are also expected to moderate their expectations for

the pay and geographic location of acceptable jobs if they remain unemployed for a

prolonged period. The 2008 reform did contain one advantage for the unemployed,

which is the possibility of becoming eligible for benefits after four months on the job,

rather than six months previously.

The fourth and final strand of the government’s efforts to expand labor market

flexibility was to increase the financial returns to taking jobs and working longer hours.

The TEPA law, as noted above, increased the take-home pay of workers putting in

overtime hours by exempting these earnings from taxes and social security charges. The

15

overhaul of the RMI operated in a similar spirit (Greciano 2010). In 2009, the RMI was

replaced by the revealingly named “Active Solidarity Income” (Revenu de Solidarité

Active, RSA). Aside from more sustained assistance with job search, the main change

introduced under the RSA was to allow recipients to combine government benefits with

earnings from employment, so that there would always be a significant advantage to

working, even in a part-time, minimum-wage position. The RSA also made subsidies

available to offset the costs associated with working, such as transportation and childcare.

The early fiscal, welfare, and labor market policies of the Sarkozy administration

were hardly an exercise in Thatcherism. The government proceeded cautiously,

negotiating compromises with the social partners wherever possible (albeit often

threatening to legislate should an agreement not be reached). Moreover, Sarkozy was

willing to offer carrots as well as sticks, increasing the take-home pay of the unemployed

who took jobs or the already employed who worked longer hours. Still, the direction of

French reform was clear. Each change chipped away at the social anesthesia state,

reducing social spending and taxes, while expanding labor market flexibility. The

problem for Sarkozy is that this move in a neo-liberal direction took place at precisely the

moment when the neo-liberal model experienced its greatest crisis since the 1930s. The

2008 financial meltdown induced Sarkozy to take up a different kind of economic

agenda, one more closely associated with France’s old dirigiste ways.

Section 4 – Sarkozy’s Statist Response to the Crisis Sarkozy responded to the 2008 meltdown by tacking in a sharply neo-dirigiste

direction. There were several reasons for this move. First, the severity of the economic

crisis meant that no actor other than the state possessed the means to respond quickly to

avert disaster. In France, as in other countries, financial institutions teetered on the verge

of collapse and lending dried up, necessitating some kind of bank rescue and

recapitalization. The economy sank into recession, making it imperative to launch a

stimulus package. And the spread of plant closings and unemployment compelled the

government to step in to alleviate the suffering of those who were poor and jobless

through no fault of their own. Faced with a historic crisis of capitalism, even liberal

regimes like the United States and United Kingdom intervened on a massive scale.

Sarkozy’s statist turn was driven by more than economic imperatives. It also fit

well with his personality and governing style. Despite the relatively neo-liberal

orientation of the government’s initial policy, Sarkozy is no neo-liberal dogmatist.

Already, as Minister of the Economy in 2004-2005, he had displayed a willingness to

engage in dirigiste practices. Sarkozy orchestrated the bailout of the high-speed train

manufacturer, Alstom and helped arrange a merger between two French pharmaceutical

companies, Sanofi and Aventis that was designed to prevent a takeover of the latter by a

Swiss company, Novartis. Both of these moves prioritized the defense of French

companies and national control over principles of free competition.

Sarkozy is first and foremost an activist, rather than a neo-liberal. As President,

he has been compared to the energizer bunny and earned such nicknames as

“omnipresident” and “hyperpresident” for his perpetual activism (Foucault 2007). More

than any President under the Fifth Republic, Sarkozy has insisted on being front and

center in the public eye, making all decisions big and small, and launching new initiatives

on an almost daily basis. If at the outset of his Presidency, being an activist meant being

16

a neo-liberal, in response to the financial crisis, Sarkozy seemed to jump at the

opportunity to be an activist by becoming a neo-statist.

Sarkozy’s statist turn also dovetailed with his electoral strategy of ouverture or

opening to the left. Following his election as President, Sarkozy appointed a number of

leaders from the other side of the political spectrum and left-leaning associational groups

to positions within his government (Szarka 2009).5 Sarkozy maintained that he was

simply trying to get the best people for the job. This claim may have been true, but there

was a clear political calculus behind the initiative. The raid on leftist leaders disoriented

and demoralized the opposition Socialist party, which gave the appearance of a sinking

ship abandoned by its crew. The party divided over the issue of participation in the

Sarkozy administration, with some Socialist calling for punishment or even for the

exclusion of figures who “collaborated” with Sarkozy. In response, several participants

either took a leave of absence from the Socialist Party and its governing body or quit the

party altogether.

Another important political benefit of ouverture was to blur the boundaries

between left and right. Sarkozy sought to advance the notion that he was governing on

behalf of all French citizens, not just supporters of the right. He was also receptive to all

good ideas, without regard to their political origins. Thus, even if the center of gravity of

Sarkozy’s initial policy was clearly neo-liberal, he enacted several reforms that spoke to a

concern for the working class and the disadvantaged, traditional constituents of the left.

The transformation of the RMI into the RSA, which boosted the earnings of those

moving from welfare to work, and the de-taxing of overtime hours, which boosted

worker pay packages, were emblematic of this effort to occupy some of the policy space

of the left.

The crisis of neo-liberal capitalism provided Sarkozy with an opportunity to take

the strategy of ouverture a step further. If the French had mostly reconciled themselves

to the market since 1983, they had never embraced the market. This ambivalence was

especially pronounced among supporters of the left. Consequently, a neo-statist response

to the financial meltdown could potentially allow Sarkozy to steal both the left’s policy

agenda, that of taming and humanizing capitalism, and many of its voters. In short,

Sarkozy’s statist turn was driven by the economic pressures stemming from the financial

meltdown, for sure, but also by political calculations – in particular, by the desire to

project an activist image and to divide and demoralize the left. This statist turn

encompassed four main elements: 1) a return to Keynesian demand management; 2) a

5 These figures included: Bernard Kouchner, a co-founder of Doctors without Borders

and a leader in the Socialist Party, who became Minister of Foreign and European

Affairs; Jean-Marie Boeckel, a Socialist Senator and Mayor of Mulhouse, selected to be

State Secretary for Cooperation and Francophone Relations; Jean-Pierre Jouyet, a former

Jospin Cabinet Director, who was chosen to serve as State Secretary for European

Affairs; Eric Besson, who had been Ségolène Royal’s economic advisor until breaking

with her just prior to the presidential election, named State Secretary in Charge of

Forecasting and the Evaluation of Public Policy; Martin Hirsch, the head of the Emmaüs

France organization that works to help the homeless and poor, who was named High

Commissioner of Solidarity; and Fadela Amara, founder of the feminist group, “Neither

Whores nor Submissives,” who became State Secretary for Urban Policy.

17

loosening of social spending; 3) the revival of industrial policy; 4) a commitment to more

effective regulation.

1) A Return to Keynesian Demand Management

On the fiscal front, France’s budget deficit reached 7.5 percent of GDP in 2009

and is slated to top 8 percent in 2010. Part of the reason has been the operation of

automatic stabilizers from the country’s massive welfare state. In addition, following a

Keynesian logic, the government launched a EUR 26 billion stimulus package in

December 2008, which emphasized investment in public infrastructure and aid to small

business (OECD 2009). Sarkozy has also primed the pump through tax cuts. He initially

announced a one-year holiday for local business taxes (taxe professionnelle), then

decided to eliminate the tax altogether as of 2010. The elimination of the taxe

professionnelle will save French businesses EUR 12.3 billion in 2010, according to the

government, before dropping to around EUR 6.3 billion in subsequent years, as partial

replacement taxes deemed less dissuasive to investment kick in (Ministry of the Economy

2010).

2) A Loosening of Social Spending

Although Sarkozy’s Keynesian policy has emphasized support for investment as

opposed to consumption, a second shift in the wake of the financial meltdown has been a

greater receptiveness to social spending. The government’s position that the social

anesthesia state was discouraging employment, while perhaps reasonable during a period

of growth, became less tenable as the recession multiplied the number of people who are

poor and unable to find jobs through no fault of their own. Sarkozy acknowledged as

much, declaring early in October 2008: “We’ll get out of this crisis. I won’t leave

anyone by the side of road. We will protect everyone” (Libération, 29 October 2008).

In this spirit, the government has launched a series of social initiatives. Initial

measures included an increase in the benefit rate for part-time workers who lose their

jobs (60 percent of previous wages instead of 50 percent) and the creation of an

additional 100,000 subsidized employment opportunities (OECD 2009). The December

2008 fiscal stimulus plan added a EUR 200 bonus for the 3.8 million recipients of the

RMA. Following a “social summit” with the unions in January 2009, Sarkozy announced

a EUR 1.3 billion package of measures for the “victims of the crisis in a spirit of

responsibility and social justice” (Libération, 18 January 2009). This package included

more generous unemployment benefits, funds for retraining and job placement, a EUR

150 bonus for low-income families, and a EUR 200 subsidy to help offset the costs of

care for children, the handicapped, or elderly relatives. Finally, in April 2009, Sarkozy

put forward a EUR 1.3 billion “youth employment plan” to encourage employers to hire

and train unemployed youths under the age of 26.

3) The Revival of Industrial Policy

A third dimension of Sarkozy’s response to the financial crisis has been a revival

of voluntarist industrial policy. Not all such initiatives have been unique to France, of

course. As one French scholar has noted, “The return of industrial policy is not a Franco-

French phenomenon, but can be observed in almost all the industrialized countries”

(Chevallier 2010: 5). Sarkozy, like other leaders, was forced to rescue the banking

18

sector. There were two punctual interventions to save banks on the verge of failure. In

October 2008, the French government joined with the Belgian and Luxembourg

governments to rescue Dexia, the leading lender to local authorities in France and

Belgium, at a cost of EUR 6.8 billion (EUR 3 billion from France). The government also

orchestrated a merger and injected EUR 5 billion into two French banks, the Caisse

d’Epargne and Banque Populaire that had been brought to their knees by exposure to the

US subprime market and the collapse of Lehman Brothers.

On a grander scale, in October 2008, Sarkozy announced a massive EUR 360

billion rescue package for the banking industry as a whole (OECD 2009). The package

included EUR 40 billion in fresh capital to bolster the solvency of France’s leading banks

and EUR 320 billion in loan guarantees to improve liquidity and lending. Still, in

comparative perspective, this rescue package is not terribly distinctive or large. Germany

committed EUR 480 billion and the United Kingdom EUR 382 billion to their respective

financial institutions (Libération, 9 February 2009).

The Sarkozy administration also intervened to help the French auto industry

(Greciano 2010). In early 2009, Sarkozy provided EUR 7.8 billion in subsidized loans to

the main domestic manufacturers (Renault, Peugeot, Citroën, Renault Trucks) along with

their subcontractors. The government provided further support to the industry through a

French version of “cash for clunkers” programs seen in the US and Germany, tendering

rebates of up to EUR 1000 for the replacement of cars older than ten years with new,

fuel-efficient models. Once again, though, France was not alone in deeming the auto

industry “too big to fail.” The US likewise supported domestic auto manufacturers

through a combination of capital injections and incentives for new car purchases.

Where Sarkozy’s industrial policy appears more distinctive is in going beyond the

rescue of those too big to fail. Sarkozy has launched several initiatives that evoke a

traditional French dirigiste approach not seen since the early 1980s. In November 2008,

he announced the creation of the Strategic Investment Fund (Fonds Stratégique

d’Investissment, FSI), modeled on the sovereign wealth funds of several foreign countries

(Greciano 2010). The FSI was given EUR 20 billion in capital to invest in companies

that are critical to the competitiveness of the French economy based on their potential for

growth, technological mastery, savoir-faire, export potential, or brand value. In a neo-

mercantilist tilt, Sarkozy also entrusted the FSI with protecting “companies that may

become the prey of [foreign] predators.”

The FSI was supplemented by the “grand national loan” (grand emprunt national)

one year later. Sarkozy commissioned a study by two former Prime Ministers, one on the

right (Alain Juppé) and one on the left (Michel Rocard), to identify priority measures for

promoting French industry (Greciano 2010). Based on Juppé and Rocard’s

recommendations, Sarkozy launched a state loan campaign in November 2009 that will

raise EUR 35 billion. Of that EUR 35 billion, EUR 11 billion are intended to help five to

ten institutions of higher education reach world class level, EUR 8 billion will promote

technology transfer from research to industry, EUR 6.5 billion will support industrial

SMEs, EUR 5 billion will fund sustainable development initiatives, and EUR 4.5 billion

will encourage France’s transition to a digital economy (Le Monde, 14 December 2009).

Most recently, beginning in November 2009, the government convened a series of

meetings, the Estates General of Industry (Etats généraux de l’industrie), to analyze the

problems of French industry. At the conclusion of the Estates General in March 2010,

19

Sarkozy announced over EUR 1 billion in new aid, declaring “France must keep its

factories; France must keep its instruments of production” (Libération, 4 March 2010).

Sarkozy also spelled out a series of specific targets in the purest 1970s industrial policy

style. These targets included: increasing industrial production by 25 percent in five

years; boosting France’s share of European industry by 2 percent by 2015; sustaining

employment in industry at current levels; returning to a trade surplus in manufactured

goods (excluding energy) by 2015 (French Presidency 2010).

Along with ambitious industrial policy initiatives like the Strategic Investment

Fund, National Loan, and Estates General of Industry, Sarkozy has periodically

responded to pleas and protests with pledges to save individual factories on the verge of

closing (Mittal steel, Caterpillar tractors, etc.). Sarkozy has also impinged on managerial

decision-making in ways that harken back to an earlier era. For example, in return for

low-interest state loans, French auto manufacturers were required to pledge not to make

any lay-offs for one year and to close no plants in France for the duration of the loans.

This concession did not stop Sarkozy from voicing outrage that French automakers

purchase only one-third of their components from French suppliers and vowing to

eventually boost the figure to two-thirds. Nor has Sarkozy been shy about placing

loyalists in positions of economic influence. As part of the state-supported rescue and

merger of Banque Populaire and Caisse d’Epargne, Sarkozy named his main economic

policy advisor, François Pérol as CEO of the new entity. Pérol is not only a Sarkozy

loyalist, but also a figure closely associated with statist industrial policy.

4) A Commitment to More Effective Regulation

Sarkozy’s more interventionist approach to industry speaks to the fourth

dimension of his response to the financial meltdown – a commitment to robust regulation.

Sarkozy has railed against the laissez-faire excesses of the neo-liberal age. In his first

public speech following the outbreak of the crisis, he announced: “Laissez-faire is over.

The market that is always right is over” (Libération, 26 September 2008). Sarkozy

denounced unchecked speculation by financial institutions, the excessive pay of

executive and traders, and the provision of golden parachutes to CEOs who ruined their

companies. Instead, what is needed is “ a new balance between the State and the

market.” Sarkozy called for no less than a “refounding of capitalism,” starting with a

global summit “to go back to square one with the global financial and monetary system,

just like we did at Bretton Woods after World War II.”

Sarkozy has been a forceful advocate of coordinated regulation across Europe and

the G20. Among the measures he supports are: supervision of financial rating agencies;

more effective book-keeping rules; the regulation of hedge funds; tight controls on stock

options, bonuses, and pay for executives and traders; the blacklisting of tax havens; and a

tax on financial transactions to discourage speculation. To signal his seriousness of

purpose, in the run-up to the London G20 summit in April 2009, Sarkozy threatened to

leave early or refuse to sign the final communiqué unless meaningful reforms were

introduced: “If the hoped-for results are not there, I will not sign the communiqué. The

crisis is too serious to allow ourselves a summit for nothing” (Libération, 2 April 2009).

Back home, Sarkozy’s energies have focused on executive bonuses. As in many

countries, French leaders and citizens were shocked when traders and executives from

financial institutions that had been rescued by the state started paying themselves

20

enormous bonuses. The Sarkozy government’s response was not long in coming.

Sarkozy declared, “There cannot be efforts by those at the bottom and absolutely no

effort by those at the top. We must put an end to practices that have justly aroused the

indignation of the French” (Libération, 15 January 2009). Sarkozy’s Minister of the

Economy warned the banks that had received a first tranche of government aid and that

were scheduled to receive a second EUR 10.5 billion infusion that they would “have to

find another ATM” if their executives did not renounce their bonuses (Libération, 19

January 2009).

In short order, the government established the operating principle that bonuses

would not be allowed in companies receiving state support. Sarkozy suggested that

executives in companies undertaking lay-offs should also forego their bonuses and that he

was prepared to legislate on the matter if necessary, but no such legislation has yet been

enacted. The administration did institute a one-time 50 percent tax on bonuses above

EUR 27,500 paid by tanks in 2009, an initiative that was coordinated with the British

government.

Section 5 - The Limits of Sarkozy’s Statism The 2008 financial meltdown prompted a number of shifts in the Sarkozy

administration’s economic policy. Budget deficits have grown to levels not seen since

World War II; new social programs have been launched; dirigiste industrial policy seems

to have made a return; and Sarkozy has become perhaps the leading exponent of a break

with laissez-faire capitalism, of the establishment of a comprehensive regulatory

framework. Changes such as these have fueled the widespread impression that France

has returned to its old dirigiste ways. Such an impression rests on a grossly exaggerated

view of the changes that have occurred in French policy since 2008, however. More

fundamentally, it ignores the powerful constraints -- many the result of past French policy

choices – that have severely circumscribed the possibilities for a revival of state direction

of the economy. Neo-dirigiste initiatives have been greatly limited by a combination of

intellectual, fiscal and geopolitical constraints.

1) Intellectual Constraints

The first constraint is intellectual or conceptual. The Sarkozy administration

lacks a coherent strategy or vision for French industry. Under the dirigiste model, French

planners pursued a “national champions” strategy based on scale economies, technologies

transferred from state research labs, and subsidies and guaranteed markets to encourage

investment and innovation (Cohen and Bauer 1985; Cohen 1992). This strategy may

have been wise or may have been foolish, but it was unquestionably a strategy.

The Sarkozy administration, by contrast, has no real strategy for the companies

that it has been helping. The bank bailouts initially came with no strings attached other

than an obligation to increase lending in 2009, which the banks promptly ignored

(Massoc and Jabko 2011 forthcoming). It was only in the wake of the bonus scandals

that the government began intervening more closely in the banks’ affairs, and here, the

motivation was social (to curb abusive bonus practices), rather than economic.

Much the same can be said of the aid to the automobile industry. The government

did not pursue any kind of economic vision. It did not seek to accelerate the pace of

investment or development of new car models. It did not condition aid on the

21

introduction of greener hybrid or electric cars. Instead, as with the banks, the

government’s concerns were social – to prevent factory closings and lay-offs. Far from a

voluntarist industrial policy, the rescue of the bank and auto industries seems reminiscent

of the worst failings of the tail-end of the dirigiste era, when the promotion of innovation

and the industries of the future gave way to bail-outs of lame ducks for the sake of

putting out social brushfires and preserving jobs (Berger 1981; Cohen 1989; Levy 1999).

2) Fiscal Constraints

A second limitation on the return to state activism has been fiscal. The

government lacks the financial resources to pursue an ambitious economic agenda. Even

before the recession, France’s budget deficit exceeded EMU Stability Pact rules (3.4

percent of GDP in 2008, as opposed to a legal ceiling of 3.0 percent of GDP and a Euro-

zone average of 1.5 percent of GDP). So, too, did government debt, which is now

approaching 80 percent of GDP, some 20 percent of GDP above the level authorized by

the Stability Pact (Greciano 2010). Consequently, the Sarkozy administration has been

extremely reluctant to establish new spending commitments. Although France’s budget

deficit increased to 7.5 percent of GDP in 2009, this surge occurred almost exclusively

through the operation of automatic stabilizers, as opposed to government fine-tuning.

The US deficit actually increased more during this period, rising from 3.2 percent of GDP

in 2008 to 9.9 percent of GDP in 2010, despite the fact that the US welfare state is much

smaller.

The Sarkozy administration’s inability or unwillingness to spend fresh money has

sharply constrained new economic initiatives. Many of Sarkozy’s signature initiatives

have been built on the cheap, often relying heavily on the reallocation of funds from

existing programs. The December 2008 “stimulus package,” for example, was claimed to

total EUR 26 billion or 1.3 percent of GDP. Even if taken at face value, this stimulus

package would have still been considerably smaller than those of many other countries,

including the US and UK. However, the amount of new money committed by the

government was far less than the stated value. Most of the actions involved bringing

forward to 2009 expenditures that were previously to be spread out over two to three

years (accelerated investments in public infrastructure projects, early repayment of

money owed to private contractors). When these adjustments are taken into account, the

commitment of new funds to the stimulus package was not EUR 26 billion, but rather

EUR 4-6 billion.

The main industrial policy initiatives have likewise been constructed with an eye

to limiting the government’s financial obligations. The first EUR 10.5 capital infusion

for French banks came, not from the state, but rather from the state’s allied financial

institution, the Caisse des Dépôts et Consignations (CDC). The CDC receives cheap

capital primarily in the form of tax-exempt funds collected by savings banks and the post

office. In return, it performs various public missions, most notably funding the

construction of social housing and acting as a long-term investor in many of France’s

most prominent companies (including about one-half of the CAC 40, or the forty leading

enterprises listed on the Paris bourse).

The government tapped the CDC not only for the first round of bank

recapitalizations, but also for one-half the costs of the Strategic Investment Fund (FSI).

The FSI, which is tasked with supporting strategic French enterprises, received a total of

22

EUR 20 billion. The government provided only EUR 10 billion of that that EUR 20

billion, with the CDC providing the other EUR 10 billion. Moreover, just EUR 3 billion

of the government’s share represented fresh spending; the other EUR 7 billion came from

the state’s transfer of its minority share-holdings in a number of privatized companies

(including Air France and Renault). In effect, the creation of the FSI did not add much to

the French state’s industrial policy arsenal, since it involved little new money and since

the CDC, which put up much of the money, already performed the vocation for which the

FSI was established (providing long-term or stable capital to strategic French firms).

Perhaps for this reason, the CDC was given a 51 percent majority share and operational

control over the FSI.

The EUR 35 billion “Grand National Loan” has also involved a limited financial

commitment by the government. For starters, as the name indicates, the program relies

on long-term borrowing, rather than direct outlays. Moreover, EUR 13 billion of the

EUR 35 billion will come from the repayment of loans by French banks, rather than new

borrowing. On the spending side, EUR 19 billion of the EUR 35 billion is being

committed to higher education at a time when the government has been cutting

educational spending and employment from year to year. French spending on higher

education is ranked among the lowest in the OECD (1.9 percent of GDP, as opposed to

3.5 percent of GDP in the USA), and the figure has been falling since 1995 (Libération,

15 December 2009). Thus, to some extent, the “big loan” will wind up replacing funding

cuts in the government’s regular budgets. Sarkozy’s plan to revive French manufacturing

is even more tight-fisted. Despite the ambitious objectives (increasing industrial

production by 25 percent in five years, etc.), the administration committed barely EUR 1

billion to the enterprise.

The area where Sarkozy has been most reluctant to spend new money has been

social policy. The government argues, not without reason, that France’s generous

welfare state has automatically increased social spending significantly in response to the

recession. More controversially, the administration contends that France’s principal

economic problems are on the supply side, not the demand side, so that aid to the

consumers and the disadvantaged would benefit Japanese and German exporters, rather

than French business (Libération, 31 January 2009). The government’s December 2008

stimulus plan clearly reflected this bias against social spending. Declaring that, “our

response to the crisis is investment,” Sarkozy committed over EUR 25 billion of the EUR

26 billion stimulus plan to infrastructure spending and aid to business, with less than

EUR 1 billion devoted to a one-time, EUR 200 bonus for recipients of the RSA minimum

income.

The government’s emphasis on investment at the expense of consumption

triggered loud denunciations on the left, and in January 2009, the unions put 2 million

protestors into the streets. In response, Sarkozy convened a “social summit” with the

social partners, at the conclusion of which he announced new benefits for the

unemployed and low-income families. This package of benefits totaled only EUR 1.3

billion, however, or 5 percent of the original fiscal stimulus package. Two months later,

Sarkozy committed another EUR 1.3 billion to a Youth Employment Plan. Most of the

money in this plan took the form of subsidies to employers for hiring or training

unemployed people under the age of 26, rather than direct aid to those youths. In short,

as reluctant as the government has been to spend money in general, it has been especially

23

reluctant to spend that money on consumption and the poor, as opposed to business

investment. New social spending has been a defensive response to criticism and protest,

not a deliberate government initiative; it has been partially directed to business; and it has

been kept to the absolute lowest level possible.

3) Geopolitical Constraints

The third check on the Sarkozy administration’s interventionist temptation has

come from the international arena. Globalization has greatly complicated the task of

pursuing dirigiste strategies. Indeed, one of the reasons why the original French dirigiste

model ran into trouble in the 1980s is that while the planners were able to induce industry

to boost output, they were less able to stimulate the production of high-quality, low-cost

goods that could meet the demands of increasingly open and competitive markets (Hall

1990; Levy 1999). Dirigisme was far better suited to the hothouse environment of

postwar protected markets than to an increasingly globalizing economy. This uncertainty

about how to respond to global competition may be part of the reason why the Sarkozy

administration has not really articulated an industrial policy vision, an understanding of

the kinds of corporate strategies that the government’s programs are supposed to

promote.

The international constraint is felt perhaps most keenly with regard to Sarkozy’s

regulatory agenda. Sarkozy regularly issues hellfire-and-brimstone denunciations of

laissez-faire, arguing that nothing short of a “refounding” and “moralizing” of capitalism

can save capitalism. He is constantly calling for new financial regulations, new

restrictions on bonuses and executive pay, new crackdowns on tax havens, new taxes on

financial institutions. Yet little has changed, even in France. Aside from the one-time

tax on bank bonuses, Sarkozy has enacted no comprehensive regulations. The only

French companies that have been subjected to new rules are those that have received state

aid (and only so long as they continue to receive state aid).

In a world of globalization, effective regulation of corporate behavior, especially

on sensitive issues of pay, is widely believed to require a degree of international

coordination. Otherwise, the leading regulatory runs the risk of seeing business flee to

less demanding foreign pastures. Just as Keynesianism in one country led French capital

to flow to more competitive trading partners in the early 1980s, a unilateral regulation or

executive pay or bonuses today runs the risk of sending financial and other business

employment offshore. Sarkozy is, therefore, largely unwilling to go it alone. Sarkozy

has been working to rally support within Europe or across the G20, but he clearly feels

that the French state lacks the effective capacity to pursue re-regulation in one country.

The 2008 financial meltdown has certainly changed Sarkozy’s economic policy.

To an agenda of neo-liberal reform has been added a series of neo-statist initiatives and

aspirations. Neo-statism has not supplanted neo-liberalism, however. The government’s

early liberalizing reforms remain largely in place and, in some cases, have been extended

(the elimination of the local business tax, the non-replacement of one-half of retiring civil

servants, the easing of restrictions on Sunday work, etc.). Moreover, the neo-statist

agenda has run up against a series of checks and constraints, including: uncertainty

among French elites as to just what a voluntarist industrial policy should entail; the fiscal

limits of the cash-strapped French state; the government’s ambivalence about social

spending; and the need for international coordination to make proposed new regulations

24

effective. Finally, there are signs of a new inflection in Sarkozy’s policy, of a return to

the kinds of liberalizing reforms that characterized the pre-crisis period.

Section 6 – Sarkozy’s Policy Going Forward: A Return to Economic Liberalization? Nicolas Sarkozy’s effort to blend neo-statism and economic liberalism has not

gone over well with the French electorate. Several opinion polls at the end of March

2010 gave him an approval rating in the 30 percent range, the lowest that it has ever been

(Libération, 29 March 2010). Disapproval of Sarkozy’s economic policies has also

reached record levels, with over 70 percent of respondents holding a negative view

(Libération, 31 March 2010). Of course, it is very difficult for any leader to have popular

economic policies amidst the worst economic disaster since the 1930s. Still, Sarkozy’s

blending of disparate elements seems to have antagonized voters on both sides of the

political spectrum. Those on the left tend to dismiss his neo-statist initiatives as hollow

gestures and window dressing designed to mask his true neo-liberal colors. At the same

time, erstwhile supporters on the right are confused and disoriented by these very same

neo-statist initiatives, wondering why a President of the right seems to be going to such

great lengths to please voters on the left.

Sarkozy’s party suffered a crushing defeat in the March 2010 regional elections.

The mainstream right recorded its lowest share of the vote in the history of the Fifth

Republic, and the left swept 21 out of 22 regions in metropolitan France. At first,

Sarkozy tried to dismiss the election outcome as a purely local affair or an inevitable

response to hard economic times. Under pressure from unhappy UMP Members of

Parliament, however, he publicly acknowledged that the voters were dissatisfied and that

a new approach was needed.

Sarkozy’s response has been to recommit to “the fundamentals of 2007,” to the

principles that secured his election as President. In other words, Sarkozy has decided to

play to his base, as opposed to extending the ouverture to the left. Indeed, one of

Sarkozy’s first moves was to shuffle his cabinet, allowing Martin Hirsch, the architect of

the RSA and a symbol of ouverture to leave, while incorporating representatives of rival

groups within his conservative camp. This movement was described by pundits as an

ouverture à droite or “opening to the right,” in contrast to the earlier opening to the left

(Le Monde, 23 March 2010). Subsequent cabinet reshuffles have excluded other symbols

of the opening to the left, including Foreign Minister, Bernard Kouchner and Secretary of

State for Urban Policy, Fadela Amara.

Sarkozy’s return to the fundamentals of 2007 has involved more than economic

policy. In particular, he has multiplied law-and-order and anti-immigrant initiatives to

placate conservative supporters and prevent a loss of voters to the far-right, xenophobic

National Front. Law-and-order initiatives include: calling for the expansion of minimum

sentencing requirements; appointing high-ranking police officials as Prefects in two

departments where there has been significant urban violence (Seine-Saint-Denis and

Isère); establishing police bureaus in 53 at-risk schools; and promising to create special

boarding schools or boot camps for “young people who terrorize the other students”

(Libération, 4 April 2010). Anti-immigrant measures include: a law banning the

wearing of burqas or niqabs (Islamic garb that covers the face and body) in all public

places; a proposal to rescind the French citizenship of naturalized immigrants who are

guilty of endangering the life of a police officer or other public official, of practicing

25

polygamy, or of engaging in female circumcision; and a massive crackdown on illegal

Roma encampments, with some 100 camps dismantled and 850 Roma deported in August

2010 alone. Both the burqa ban and retraction of French citizenship from naturalized

immigrants are widely believed to be unconstitutional, but such measures are quite

popular with the voters, especially on the right.6

The return to the fundamentals of 2007 has refashioned Sarkozy’s economic

policy as well. The government’s principal economic initiatives speak to a revival of

Sarkozy’s original neo-liberal economic agenda. Almost immediately after the regional

elections, Sarkozy announced that his top priority was pension reform. Despite earlier

reforms, the French pension system remains in deficit, and the problem is only slated to

get worse as the population ages. Still, from an economic perspective, it is not

immediately obvious why addressing the pension imbalance would be the top priority for

the government, especially since the necessary austerity measures would work at cross-

purposes with a Keynesian response to the ongoing recession. From the perspective of

reassuring the conservative faithful, though, the focus on pension reform made perfect

sense. The government signaled a renewed commitment to curtailing the social

anesthesia state, especially programs like pensions that pay people not to work. The

character of the pension reform was also designed to appeal to conservatives: the bulk of

the reduction in the pension deficit comes, not from increased payroll taxes paid by

employers or generalized tax increases, but rather from raising the retirement age by two

years and increasing the payroll taxes of civil servants to the same rate as private-sector

employees (from 7.85 percent to 10.55 percent of wages). Despite massive protests in

fall 2010 numbering in the millions of demonstrators along with occupations of oil

refineries that temporarily paralyzed the nation, Sarkozy stood his ground and rammed

through the pension reform. The reform was of limited economic value, eliminating at

most 40 percent of the projected deficit in the pension system, but it sent a clear political

message – Sarkozy was returning to his original agenda of paring the social anesthesia

state.

Following the Greek debt crisis, amidst growing concerns about the sustainability

of high levels of government deficits and pressure from the European Commission, the

Sarkozy administration announced a more general austerity program. The government

pledged to reduce the deficit from around 8 percent of GDP in 2010 to 6 percent in 2011,

4.6 percent in 2012, and 3 percent in 2013. To reach this target will require savings on

the order of EUR 100 billion. As with the pension reform, Sarkozy is emphasizing cuts

in public spending, instead of tax increases. Among the spending cuts announced thus

far: a three-year freeze on state spending (in nominal terms, unadjusted for inflation); a

three-year freeze on transfers to local governments; a 10 percent reduction in the

6 A poll of 1003 French people over the age of eighteen conducted by IFOP between 3

and 5 August 2010 yielded the following results: 80 percent (94 percent among voters on

the right) support the retraction of French citizenship from naturalized immigrants who

engaged in polygamy or female circumcision; 79 percent (94 percent among voters on the

right) back the dismantling of illegal Roma encampments; and 80 percent (93 percent

among voters on the right) favor a minimum sentence of 30 years in prison without the

possibility of parole for killers of police officers IFOP (2010). Les jugements sur les

mesures de lutte contre l'insécurité. Paris. August 2010.

26

operational budget of all government ministries; the phasing out of most of the measures

associated with the stimulus package; the non-replacement of one-half of all retiring civil

servants; and sharp reductions in employment subsidies and social benefits, notably

housing allowances.

Sarkozy’s neo-liberal turn appears to be eclipsing his environmental policy.

Immediately after the regional elections, Sarkozy announced that he was scrapping a so-

called “carbon tax” designed to discourage pollution. The carbon tax had been a symbol

of Sarkozy’s ouverture policy. The tax was the product of negotiations with (often left-

leaning) environmental groups, and the legislation was based on a report prepared by

former Socialist Prime Minister, Michel Rocard. More fundamentally, the carbon tax

represented an effort by Sarkozy to show that the left does not possess a monopoly on

ecology, that ecology could be an agenda of the right.

Despite all manner of exemptions for industry and agriculture and promised

compensation for households to insure that there would be no net increase in taxation,

conservative supporters hated the carbon tax. They saw it as a burden on business and

were skeptical that the government would fully compensate households for the costs (a

skepticism shared by many on the left). Although Sarkozy had insisted repeatedly that he

would enact some kind of carbon tax (the initial version had been struck down by the

Constitutional Court for treating citizens unequally), he backed down after the regional

elections.7 Several subsequent decisions have reaffirmed this prioritizing of economic

and electoral concerns over environmental concerns. In May 2010, Sarkozy postponed

the implementation of a tax on large trucks (over 3.5 metric tons), and there is

widespread suspicion that the tax will never see the light of day. In July, when the

ministries were given their budget forecasts for the next three years, the Ministry of

Ecology took the biggest hit.

A common theme of all of Sarkozy’s recent economic measures has been a

dogged resistance to tax increases. The “carbon tax” was discarded, despite provisions to

compensate households for the measure, because it was seen as creating a new tax.

Similarly, the pension reform and the austerity budget were long on spending cuts and

short on tax hikes. Despite tremendous budgetary pressures, the only tax increases that

Sarkozy has countenanced have entailed rolling back certain loopholes or tax deductions

(mostly on employment subsidies, but also including the partial deduction of home

mortgage interest that was part of the 2007 TEPA reform). The administration has

argued, somewhat implausibly, that the elimination of loopholes does not constitute a tax

increase, since taxpayers can choose whether or not to exploit a loophole. Still, the

government has been able to largely avoid generalized or highly visible tax increases.8

Whatever the economic merits of this approach, it has allowed Sarkozy to preserve the

fiscal shield (limiting total direct taxation to 50 percent of earnings), which he views as

the defining reform of his administration and a symbol of his commitment to reining in

7 Officially, Sarkozy did not abandon the tax, but rather delayed it until it could be

implemented across the EU, so as to avoid conferring an advantage on countries that do

not tax pollution. 8 The one exception was an increase in the top income tax bracket from 40 percent to 41

percent as part of the pension reform, a measure that was expected to raise only EUR 230

million in 2010 (Les Echos, 18 June 2010).

27

French taxation. Indeed, Sarkozy has drawn a line in the sand, declaring that he will not

abandon the fiscal shield under any circumstances.

It is too soon to tell how Sarkozy’s recent neo-liberal turn will play out.

Obstacles abound. The economy remains in crisis, fueling demands for relief; the social

situation is literally “explosive,” with plant closings leading desperate workers to threaten

to blow up their factories if they do not receive better severance packages; and some

pundits and politicians question the wisdom of responding to an electoral victory of the

left by tacking to the right. Sarkozy’s law-and-order and anti-immigrant initiatives have

also prompted tremendous criticism. A future policy reversal is by no means impossible,

especially given the impetuous, unpredictable nature of the President. Still, it is clear that

the neo-statist project, whatever its appeal as a response to the 2008 meltdown, is not

about to marginalize economic liberalism anytime soon. Indeed, the relevant question

may be whether it is Sarkozy’s neo-statist turn, rather than his initial neo-liberal

orientation, that will ultimately prove to have been a historical blip.

The evolution of French economic policy under Nicolas Sarkozy points to several

lessons for understanding how states respond to economic crises like the 2008 financial

meltdown. The first is that the response to crisis is shaped by long-term structural

factors, not just short-term political decisions. Historical-institutionalist scholars,

operating from a “punctuated equilibrium” perspective, often distinguish between periods

of normal politics or stasis, when little change occurs, and periods of crisis or “critical

junctures,” when fundamental shifts are more likely (Piore and Sabel 1984; Katznelson

2003; Capoccia and Keleman 2007). It is only a slight exaggeration to say that the

prevailing view is that in periods of normal politics, nothing is possible, while in periods

of crisis, everything is possible. This perspective has been criticized for understating

incremental change during periods of normal politics that may cumulate to far-reaching

transformation (Thelen 2004; Streeck and Thelen 2005; Mahoney and Thelen 2010).

Recent French economic policy points to a complementary critique: the punctuated

equilibrium perspective overstates the possibilities for far-reaching transformation during

periods of crisis. Everything is not possible during critical junctures. Sarkozy was not

able to shift French policy on a dime. On the contrary, Sarkozy’s neo-statist thrust ran up

against long-standing developments in French economic policy, most notably the

dismantling of most of the tools of statist industrial policy in the 1980s and early 1990s

and the massive accompanying expansion of social and labor market programs that left

little room for new public spending. Thus, even at a moment of crisis, French economic

policy displayed a strong path-dependent character. The legacies of the movement from

the dirigiste state to the social anesthesia state in the mid-1980s essentially trumped

Sarkozy’s neo-dirigiste aspirations a quarter-century later.

The second lesson of the French experience is that state responses to crisis cannot

be read off simplistic notions of “national models” or “national policy styles.” Part of

the reason is that these images may be dated or inexact. In the wake of the far-ranging

changes in French economic policy since the early 1980s, it is by no means evident that

France should still be considered an archetype of statist or dirigiste economic policy

(Vail 2010). Moreover, images such as “statist France” are at best ideal-types; the reality

for any given situation is invariably more complex. In the case of the response to the

financial meltdown, it is clear that “liberal” Britain and arguably the US as well

responded in a more aggressive and interventionist fashion than “statist” France. The

28

Anglo-American fiscal stimulus packages were larger; more strings were attached to

rescue packages for banks and industry; and regulatory reform has gone further. Perhaps,

this unexpected outcome reflects the greater severity of the crisis and sense of urgency in

the US and UK; perhaps, there is a latent capacity for state action among liberal political

economies that has not been fully appreciated in the past (Levy 2006). In any case, the

inescapable conclusion is that to understand how states respond to crisis, we must move

beyond cartoonish and often outdated “national models.”

The third lesson of the French experience is that the “return of the state” does not

flow automatically from the crisis of neo-liberal capitalism. A statist response to crisis

must be forged, not simply presumed. The Great Depression triggered a variety of

responses, and many countries, most notably Britain, continued to essentially hew to their

pre-1929 orientation (Gourevitch 1986; Hall 1989). The prospect of renewed state

intervention is no less controversial today. Critics contend that whatever the current

problems of the economy, the state will only make matters worse. There are also

powerful interests, such as the financial sector and other business groups, which have no

desire to be subjected to additional regulation or taxation. Overcoming this resistance is

no mean feat (Levy 2006). It requires a vision of what the state needs to do, along with

the fiscal and institutional capacity to pursue this vision. Such elements have been sorely

lacking from the French context, and the return of the state has stalled. Thus, even in a

country with a long tradition of state intervention in the economy and a relatively positive

view of the state, a coherent, statist response to the crisis of neo-liberal capitalism is

anything but inevitable.

29

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

1984 1989 1994 1999

Nu

mb

er o

f W

ork

ers

Source: DARES (1996, 2000)

FIGURE 1 - NUMBER OF FRENCH WORKERS IN PUBLIC LABOR MARKET PROGRAMS

Early Retirement

Worker Training

Subsidized Public Employment

Subsidized Private Employment

30

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